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Evaluation of unconventional monetary policy in a small open economy

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  • Martin Pietrzak

Abstract

This paper shows what are the consequences of omitting international dimension issues like international trade and financial channels when modeling the effects of unconventional monetary policy tools. To evaluate the size of discrepancies between consequences of a large-scale asset purchase program in a small open economy and a closed one, we extend one of the existing models analyzing a large-scale asset purchases by adding small open economy features. Finally we compare it with the original version. We find that previous studies might overestimate the extent to what large-scale asset purchases affect real activity. Allowing agents to trade internationally with goods as well as saving via foreign, currency denominated deposits leads to a leakages that result in substantial differences between large-scale asset purchases in a small open economy and an autarky. Moreover, our results show that negative supply side shocks have less severe consequences in a small open economy comparing to an autarky, because they are offset by the real exchange rate depreciation which boosts competitiveness.

Suggested Citation

  • Martin Pietrzak, 2016. "Evaluation of unconventional monetary policy in a small open economy," FIW Working Paper series 167, FIW.
  • Handle: RePEc:wsr:wpaper:y:2016:i:167
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    References listed on IDEAS

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    More about this item

    Keywords

    unconventional monetary policy; financial frictions; small open economy;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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